Secret report: Lynas told of Malaysia risks in 2011

Lynas management was warned eight years ago that the rare earths miner had failed to "engage meaningfully" with Malaysia and its operations in the country could be jeapordised if it did not change the way it dealt with environmental concerns and the government.

The Herald and Age have obtained a confidential report delivered to Lynas in 2011 by Australian advisory firm Futureye that concluded the company was in "urgent need" of winning the local community's support for the Malaysian operations' future.

The report warned that failure to win local support would not just jeopardise the company's Malaysian business but also call its reputation as a good corporate citizen into question at home in Australia.

Lynas is fighting off a $1.5 billion takeover bid from Perth-based conglomerate Wesfarmers with the viability of its operations now hinging on a decision by Malaysian Prime Minister Mahathir Mohamad.

Prime Minister Mahathir and his Cabinet's decision has the potential to threaten Lynas' viability.Credit:Yam G-Jun

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The company continues to face major concerns about its 100 hectare materials plant in Kuantan, with community groups stepping up pressure on the government to suspend its operating license.

The Wesfarmers takeover has been mired in allegations of aggressive tactics and has caught the attention of the corporate regulator.

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The Herald and the Age revealed last week that the Australian Securities and Investments Commission had requested detailed information from Lynas and Wesfarmers about communication between the companies before the public announcement of the takeover bid on March 26.

Sources say the prospect of a full takeover was first raised by Wesfarmers managing director Rob Scott to Lynas chief executive Amanda Lacaze and the company's chairman Mike Harding in two separate meetings in early February.

Lynas rebuffed the approach and considered the matter to be over, allowing directors to buy shares in their own company in early March. Lynas denies any wrongdoing.

Mr Scott met Mr Mahathir earlier this month, leading to concerns by those close to Lynas of inappropriate inteference in the Malaysian government's decision.

Following that meeting, Mr Mahathir said Lynas would have to extract radioactive material from its ore before shipping it to Malaysia as one condition of keeping its $1 billion plant open.

Another condition — something the company has previously said was unfeasible — was the removal of more than 450,000 tonnes of low-level radioactive waste from the country by September.

Lynas' auditor Ernst & Young said in February that if the company could not successfully negotiate with the Malaysian government about its processing plant, there was "a material uncertainty that may cast significant doubt about the consolidated entity’s ability to continue as a going concern".

The confidential 2011 report by Futureye appears to anticipate some of these issues.

"If Lynas is convinced that its political support in Malaysia is so unwavering that it will withstand deep and broad community opposition, then outrage management should be at most a peripheral strategy, aimed at diminishing the reputational cost of a company-government partnership that has largely ignored stakeholder concerns and intends to continue to ignore them," the report reads.

It also warned Lynas management that past experience showed "many such situations unravel".

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"Government officials can betray their unenforceable promises to corporations with impunity, and routinely do so when it would be politically costly for them to stay the course," it reads.

Lynas' failure to "engage meaningfully" in the two years it had been in Malaysia meant "community outrage is escalating at a time when Lynas is awaiting its pre-operating licence".

Unless Lynas began immediate engagement, the report argues, the issue would grow beyond the company's control.

The 2011 document also warned Lynas about its reliance on an administration headed by then prime minister Najib Razak, Mr Mahathir's political rival who is now being investigated for corruption.

"Corruption (or suspected corruption) is a serious issue that requires proactive management by Lynas ... whether there is a direct allegation of any corrupt practice in relation to the project or not, it is essential that Lynas publicly commits to non-corrupt practices."

"It needs to make it credible that senior management in Australia is actually scrutinising (the plant's) managers and contractors in a way that would make corrupt practices hard to carry out."

Lynas, in a statement, said a report produced by the International Atomic Energy Agency had found the company had "instituted a wide range of public information and stakeholder engagement activities" since 2011, when the organisation visited the processing plant.

"The company has carried out a broad communication programme including plant tours, media briefings and display panels showing real-time monitoring data, as well as launching corporate social responsibility projects with local communities," the statement reads.